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The European government bonds plunged Monday after Federal Reserve Chair Yellen said on Friday that tighter monetary policy in the U.S. is warranted if economic data continue to improve. The benchmark German 10-year bonds yield, which moves inversely to its price rose 3 basis points to 0.171 percent, French 10-year bunds yield climbed 3 basis points to 0.501 percent, Italian equivalents inched up 1 basis point to 1.375 percent, Netherlands 10-year bonds yield jumped 3 basis points to 0.380 percent, Portuguese 10-year bonds yield up 3 basis points to 3.089 percent, Spanish 10-year bonds yield ticked higher 1 basis point to 1.497 percent and Irish 10-year bonds yield rose 3-1/2 basis points to 0.808 percent by 0900 GMT.
The Fed Chair Yellen on Friday said that if economic gains continue and if the labour market continues to improve that it is appropriate for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate. Although lacking a time factor, this continues to point to increased support for a summer rate hike from the FOMC.
Looking ahead, the European Central Bank is expected to stay on hold at its policy meeting, scheduled on Thursday since certain comprehensive measures that were ruled out in March, are still waiting to be implemented. Against such a backdrop, the Central Bank is most unlikely to act to drop rates any further. Further, the inclusion of corporate bonds to the asset purchase program and the LTROs are likely to occur next month, while the increase in the quantum of the QE program took effect last month, DBS reported. Further, CPI-led inflation in April and May unemployment rate will probably reinforce that inflation will likely remain on the downside with household sector befits recovering from a sharp turn in the jobs market.
In the meantime, Eurozone’s apex bank predicted that May inflation is likely to fall marginally lower by -0.1 percent on year, compared to -0.2 percent in April, with core inflation modestly moving up. April unemployment rate is seen at 10.2 percent, a shade below 10.3 percent month before.
"Brexit risks will also warrant attention after the BoE outlined a cautious approach towards the impending event risk," DBS said in a research report.
On the other hand, the European bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the European Central Bank's target. Today, crude oil prices fell to below $50 after strong dollar weighed on markets and Canadian oil sands production was expected to increase this week. Crude oil prices crossed $50 mark after the U.S. government reported a larger-than-expected drop in crude inventories last week. According to the US DOE, crude inventories decreased 4.2 million barrels, as compared to a build of +1.3 million barrels seen prior for the week ending 20 May. This came alongside an increase seen in gasoline inventories of +2.0 million barrels, from a draw of -2.5 million barrels seen prior and a decrease in distillate inventories of -1.3 million barrels, against a draw of -3.2 million barrels. The International benchmark Brent futures fell 0.74 percent to $49.58 and West Texas Intermediate (WTI) dipped 0.28 percent to $49.19 by 0900 GMT.
The markets will now focus on today’s German consumer inflation, April Retails sale, May unemployment change, Euro zone May CPI (0900 GMT) on Tuesday, May Manufacturing PMI (0755 GMT) on Wednesday and European Central Bank (ECB) June interest rate decision on Thursday (1145 GMT).
Meanwhile, the financial markets are closed in observance of Memorial Day in the U.S. and the Spring Bank Holiday in the U.K. The pan-European STOXX 600 index was down 0.11 pct and the euro-area blue-chip gauge, the STOXX 50 climbed 0.07 pct. The DAX trading 0.15 pct higher and the CAC-40 ticked down 0.14 pct by 0900 GMT.
